10/12/2011 03:14 EDT | Updated 12/12/2011 05:12 EST

Ottawa beats estimate of annual deficit by $2.8 billion as revenues rise

OTTAWA - The federal government recorded a surprisingly low $33.4 billion deficit last year, it said in a final accounting that puts Ottawa on a stronger financial footing to tackle economic uncertainties.

The government's final numbers for the 2010-11 fiscal year downgrades the deficit by $2.8 billion from the estimate it gave in June's update, and is almost $16 billion ahead of what it had originally budgeted.

It also represents a 40 per cent decline from the record $55.6 billion hole it dug the year before, when Ottawa ramped up spending to soften the blow from the global recession.

The lower starting point to this year's finances gives Ottawa greater flexibility going forward for policy actions. It both puts it on a better track to balance the budget in four years, as it has pledged, while creating more fiscal room to reverse course if economic conditions deteriorate.

Both Prime Minister Harper and Finance Minister Jim Flaherty have repeatedly said they would be prepared to increase spending, even at the expense of their balanced-budget plan, if the economy should need help.

In its document, the government conceded that the global economic outlook has darkened considerably since the June update.

"Weakening global economic growth, particularly in the U.S. and Europe, combined with ongoing concern about sovereign debt in Europe, have led to increasing volatility in global equity, bond and foreign exchange markets," Ottawa noted. "Canada is not immune from these external developments."

Scotiabank fiscal analyst Mary Webb said it would be preferable for Ottawa to remain on its fiscal track, saying debt-reduction progress would continue to give Canada an advantage over its indebted rivals.

As of March, the federal debt stood at 33.9 per cent of the size of the economy, less than half the 77.4 per cent average for the G7 countries.

There are a variety of reasons why Ottawa's finances improved so dramatically in the 2010-11 period, said Webb, including the rollover of some infrastructure stimulus to 2011-12 and the collapsing of the costs of HST conversions in Ontario and British Columbia to the previous period.

But the overriding reason is that Canada's economy rebounded from the slump faster and stronger than the government anticipated.

"Commodity prices came back so significantly and that helped provincial resource receipts, but it also helped corporate tax (receipts)," she explained.

That in part accounts for the 6.3 per cent increase in nominal gross domestic product output, a broader measure of the government's tax base. In the budget, Flaherty planned for a 4.9 per cent gain.

"The other thing that has been fortuitous is the quite strong employment," Webb added. "Personal income taxes were up 9.1 per cent, that's a very solid number and it reflects the fact employment was up."

The government noted that by August, the economy had added 600,000 jobs from the low point reached in July 2009, most full-time. As well, the economy recovered more than all the GDP it lost during the recession.

During 2010, domestic consumption grew by three per cent, while business investment in machinery grew an average of 17 per cent in each quarter, it said.

Overall, government revenues rose by $18.5 billion in the fiscal year, while program spending fell by $5.2 billion over the previous period.

For this year, the government has budgeted for a $32.3 billion deficit, but Webb said it is possible Ottawa will beat that soft target by several billion.

Current economic forecasts suggest the government has over-estimated growth in 2011 and 2012 by almost one point at 2.9 and 2.8 per cent respectively, but Flaherty has already built in a buffer for slower growth.

Also, analysts point out that slower real GDP growth will likely, but not necessarily, translate into significantly lower revenues for Ottawa. Tax receipts are based on nominal — not real — GDP, and stronger commodity prices could make up for all or part of the impact of a reduction in real output.

In a related report Wednesday, the Bank of Montreal said provincial governments are also reporting less red ink. Of the eight provinces that have issued data, deficits were $5.5 billion lower than previously budgeted.